Thursday, January 13, 2011

Concern surrounds Boeing's tanker bid

Employees signed a banner that mark the occasion, but on everyone's mind was that the future of the assembly line may hang on whether Boeing wins a contract to build at least 179 aerial refueling tankers for the U.S. Air Force.

For inspector David Muellenbach, who's been on the 767 program for at least the last 450 jets, it's all about jobs, and not just his own. The tanker contract could bring work to Boeing for a long time.

"For my friends, and their kids. So it's for many, many years," said Muellenbach.

Boeing continues to sell the 767 as an airliner and a commercial freighter. It received three new orders last year and 767 Vice President and General manager Kim Pastega says the company continues in active talks with airlines.

But while new airline orders are welcome, the tanker is the elephant in the room.

A decision could come as early as next month whether the Boeing 767 or the Airbus 330 wins what is now the second round of competition between the two planes. In 2008, the Air Force awarded the tanker contract to a team consisting of U.S. defense contractor Northrop-Grumman and the Airbus parent company EADS, European Aeronautic Defence and Space. That award was successfully protested by Boeing, which forced a new competition. It came after the Government Accountability Office published findings that the Air Force had erred in several areas in selecting the Airbus built jet. After the successful Boeing protest, Northrop-Grumman dropped out. For a while it looked like Boeing had the contract by default, until EADS decided to bid again on its own.

"Based on what we hear, it's looking good for EADS, and not so good for Boeing," said Michel Merluzeau of G2 Solutions, an aviation and defense analyst who tracks defense deals worldwide. "There's a lot at stake for Boeing here."

Merluzeau says what's at stake for both companies is not just the 179 planes, but follow on contracts and international sales. The winner of this competition will have the lion's share of the tanker business for a long time, he says. An EADS win could hand the European defense giant more than 76 percent of the world tanker market for at least the next decade, reducing Boeing's role to just over two percent based on revenues, virtually driving from the tanker business.

On the other hand, a Boeing win would assure its domination of nearly 60 percent of the market.

Both planes are expected to meet the more than 300 requirements placed on the jets. But they are not the same. The A330 offered by EADS is bigger, and backers of the Boeing bid, including Rep. Norm Dicks (D-WA), say the cost of flying that plane over forty years would constitute enough extra fuel to pay for an entire second fleet.

Dicks and Sen. Patty Murray (D-WA) have argued not only that but the additional costs of building bigger hangers and parking ramps for the bigger jet also make it far more expensive and far less competitive than the Boeing 767. The two factors were not taken into serious consideration in the last round of competition.

Still, the Air Force picked the Airbus jet once, it could pick it again. Although the process was condemned for its flaws, Air Force brass said back in 2008 it picked the jet primarily because of its larger size and abilities to carry more fuel, cargo and even troops on its main deck.

But Merluzeau says since a new tanker fleet could be part of the Air Force as long as the current KC-135 fleet dating back as far as the 1950s, the Air Force may be seriously considering trying to cover more bases with one type of plane. He says the world continues to change, and with its bigger size the Airbus plane could deliver more fuel to fighters and other jets that flew from a further distance.

Take a hypothetical war in Asia. If the U.S. were to lose access to bases in the western Pacific, tankers would have to launch from Hawaii or other bases much further away. Boeing says it could perform the same mission, particularly with the 767's ability to be refueled in the air.

But it all may boil down to price, and as the expected announcement grows closer, anxiety increases. Boeing expects it will soon hand over its last best and final offer to the Air Force.

But in a recent interview, Jim Albaugh, the CEO of Boeing's Commercial Airplane company, and former chief of Boeing's defense business said." I don't want to win a program and lose money."

Albaugh is concerned about the subsidies Airbus received from European governments to develop the A330. Airbus lost a long legal battle this summer that concluded that the subsidies Airbus received were illegal. But so far, the Air Force has not allowed subsidies to factor into its decision.

Merluzeau says the subsidies may not be as great a factor as Boeing's backers may believe. Instead, he says EADS may have its eye on locking up the tanker market long into the future -- a market long dominated by Boeing and the KC-135.

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